Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Perhaps there is an example after all

I’m pretty pessimistic about the prospects of sorting out the housing supply/land use regulatory mess that, in conjunction with population pressures, has given us – Auckland in particular – extremely high house prices (and price to income ratios). There are no great technical barriers to getting the market working again, with housing as affordable as it used to be. But I have repeatedly noted here that I’m not aware of any country/region/locality that had once got into such a mess and had found its way back again, unwinding the morass of regulation (tell me again how many pages there are in the draft Unitary Plan). Each time I make the point, I really hope someone is going to tell me about a compelling counter-example, demonstrating that what it technically possible has also proved politically feasible.

But reading Tyler Cowen’s Marginal Revolution blog just now I found a really encouraging piece headed Laissez-faire in Toyko Land , which in turn draws on a fascinating Financial Times article Why Tokyo is the land of rising home construction but not prices . I hadn’t paid much attention to Japanese house prices, implicitly ascribing the lack of house price inflation to (a) the aftermath of the 1980s boom, and (b) the flat and now falling population. But here is the key chart in the FT article

Over the last 20 years, Tokyo itself has had about the same rate of population increase as London. A nice locality apparently relatively near the centre has had faster population growth than San Francisco. And yet look at the differences in the rates of house price increases. Sure, the chart flatters Japan because Japan has had general consumer price deflation, while the US and the UK have had general inflation – but even in real terms, the differences would be large.

Anyway, I’d encourage people to read the blog piece and the underlying article itself. It isn’t a totally laissez-faire story, but the flexibility that seems to have been introduced to the system following the 1980s boom looks impressive. I’m not expert – no doubt there are other perspectives on the Tokyo experience – and perhaps the changes that were put through in Japan could never be done in Anglo countries. But they were done in Japan. That in itself is encouraging.

UPDATE: I had been continuing to mull this FT material. It focuses on the change in prices over the last 20 years as a whole, and not at all on the levels. This 2014 link from one of the FT blogs confirms that the bulk of the 1980s boom in Tokyo prices had been reversed by 1995. However, it also includes a chart showing price to income ratios for new Tokyo apartments (in the greater Tokyo area) which – while pretty stable over the last 20 years – still seem strikingly high, especially once one takes account of the “famously diminutive” size of Tokyo apartments.

And here is an interesting post with a more extensive discussion of Japanese zoning procedures and rules.

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18 thoughts on “Perhaps there is an example after all”

“Hallways and public areas were excluded from the calculated size of apartment buildings, letting them grow much higher within existing zoning, while a proposal now under debate would allow owners to rebuild bigger if they knock down blocks built to old earthquake standards.”

Clearly we need more height and that height needs to occur in Mt Eden, Epsom, Mt Roskill, Mt Albert with 18 levels to 50 level buildings to lower infrastructure and transportation costs.

Len Brown’s intercity rail is going to cost us ratepayers $2 billion to get from Britomart to Mt Eden. Len Brown estimates a cost of another $8 billion to connect the rest of the city. I seriously doubt $10 billion for intercity rail is going to be sufficient. To get from Mt Eden to Manukau or Slyvia Park alone will likely cost $10 billion. What about Albany and New Lynn? Our high rise metropolitan cities under the Unitary Plan is too far away. The cost of preserving viewshaft and visual height limits on 57 sacred volcanoes and surrounding land is just too costly.

I thought of you when I saw that article. I had not heard of the Urban Renaissance Law.

I think this perfectly illustrates the conclusion that many have come to, is that the best shot at reform comes from the Federal level where they are not so afraid of local politics backlash. This should be especially the case in NZ where most of the cities are Labour governed anyway.

Having lived in Japan in the mid-1990s, I fully agree with the observation that Japanese cities are ugly from the sky, but exciting at ground level. I know many NZers who have lived in Japan and I think we all agreed that Japanese cities are great to live in, especially considering the resource and population pressures of those small islands. In many ways the “superblock” concept that Barcelona is looking at has been presaged in japan since WWII.

The article does a great job of capturing the self-renewing nature of a city. In the West we are obsessed with building “affordable” housing. We forget that if we make it easier to build housing, there will always be older housing stock falling into the affordable range. Today’s luxury apartment spec will hopefully be standard in 30 years.

Many of the buildings that are heritage listed in Western cities are hideous, impractical or dangerous. Per Ed Glaeser, there should be a cap on the number of heritage buildings per city; not above 100 in the case of Auckland, I would have thought.

What Tokyo (and to a certain extent Singapore) give us is the notion that affordable housing is not necessarily a Houston cookie cutter approach.Japan goes hard out on control over transport corridors and lets the market sort the rest out. And we like to forget Houston relies on transport corridors supplied externally (federally).

So Auckland can be what it needs to be as long as the balance between central government, Auckland Council and the private sector is right.

Great post, Mike. That’s an excellent collection of links.
Three quick thoughts.
Like Blair (above) I’ve also lived in Tokyo (1980s) and agree with what he says – the actual planning outcomes for people living there are excellent. Tokyo IS “exciting at ground level” and “great to live in”. It’s more than the land-use planning – public transport is first class (we did without a car perfectly fine) – but it’s an important element of the success.
That link to the Japanese zoning system is terrific, and in particular it shows a key feature of the Japanese system that we should copy here – namely that all “less nuisancy” activities are also permitted in any given zone. So if (say) a developer wants to put up a block of flats on what is otherwise light industrial, he can. In practice it makes for very interesting licorice-allsorts neighbourhoods as well as massively increasing the flexibility of land use.
And finally your ‘Update’ at the end is right: the apparent small rise in Tokyo prices is still distorted by the only partial unwinding of the previous mother of all booms. The planning system can’t take all the credit. But it can take some: it’s self-evidently got a lot of inherent flexibility to respond to demographic or other changes.

On this link http://www.numbeo.com/property-investment/rankings.jsp Auckland is 114th at a 9.99 multiple of price to income…..quite modest compared to Shenzhen at 1st at 38.36, London is 7th at 30.88, Tokyo is 11th at 23.65. This makes me think price inflation over the past 20 years is the wrong metric to be fussing about.

$275 billion dollar stimulus package and negative interest rates to drag Japan out of deflation. Jeremy Batstone-Carr London based global economist on Al-jazeera believes it is not any stimulus package that would work but by increasing the population.

I saw this, and it wasn’t lost on me either. I haven’t read through the supporting content yet. I thought the smartest comment on the post noted that Japan also has very socially restrictive conventions, which may in part take some place of codified bylaws and rules (interesting thought – not sure if true). But this shouldn’t detract from the overall conclusion: just relax the damned zoning laws.

Michael, I’d like to make a belated contribution to this subject. There is another intriguing factor that anchors the price of Japanese urban real estate downwards.

That is, the legislative framework dating back decades, under which their “integrated” commuter rail / urban development enterprises operate. This includes that the operation of the transport side of the business is not allowed to be cross-subsidised from the property side of the business. This has the massive positive incentive that the enterprises, of which there are many, compete for residents-cum-potential-ridership, and “trip attractor” tenants, on property prices and rents.

This is the opposite of the perverse incentives under which most urban property markets operate in tandem with subsidised public transport. That is, the owners of the properties have no incentive to “price in” residents and trip-attractor tenants: they merely capture some value to reflect the service and the level it is subsidised, mostly independent of any actual site redevelopment on their part.

Even in Hong Kong, the enterprise is integrated but has a form of monopoly, and is a shameless rent-seeker, simply following the prices set by the land-constrained market.

The Japanese system can be viewed as akin to the automobile-based master planned communities that are developed in extreme competition to each other, in US affordable cities. The integrated property and commuter rail enterprises are competing with several other such enterprises, and the way they must compete, is by “pricing in” their ridership into their properties, then turning an operating profit on the fare revenue. Like the automobile based master planned communities in the USA, they seek to have a wide range of “trip attractors” contained within their network, so that their tenants-cum-riders have no desire to travel outside the network, and can live their entire lives within it. The system is decades mature now and the enterprises are very good at what they do. This competition provides competitive tension in the entire “non transit oriented” portion of the urban economy – and no wonder the transit mode share is so impressive (and so fiscally sustainable).

Funny enough, in the west there is almost nobody who understands the positive externalities of the predominant form of urban growth over several decades; i.e. land rent was flattened and home ownership greatly democratised by automobile based development. This is taken for granted, and experts are surprised when land-rationing policies result in massive land price volatility and economic rent evolving to the most unconscienable “extractive” form. Likewise, it seems to me that no-one in Japan understands what they have in their long-since taken for granted unique legal structures for “transit oriented development”.

This is really the only correct approach if we are to promote things like train sets as planet-saving imperatives. Otherwise they are nothing more than rent-seeking rackets.

[…] undoing restrictive land use regulations once they have been put in place. He links to a post I did a few months ago suggesting that perhaps Tokyo might have been something of a counter-example, […]

[…] the blog-site Croaking Cassandra has discussed Japanese housing affordability and thinks it is perhaps an example of successful housing supply reform. But in general Michael believes culturally and politically New Zealand will find housing […]

The key to making reform politically feasible is to bundle a set of reforms that homeowners will vote for because it is in their best interests.

One of the easiest ways to do that may be to allow individual streets to vote to relax restrictions on themselves for home extensions upwards and/or laterally (and to convert into apartments). The vote should probably simultaneously approve a design code to ensure the result is attractive.

Each individual homeowner on the street will benefit from the increased home value due to the right to extend. Because of the time it would take for such votes and the extensions to have a large market impact, the initial backlash will be minimal. So the supporters will have a strong incentive to support, whereas the opposition will be diffuse.

Thanks for the comment – interesting idea. I’ve argued for something similar but on a slightly larger scale (eg the neighbourhood level rather than street level) to parallel the private covenants that govern most new developments in NZ. I suspect street-level provisions would still meet a lot of political resistance, because of concern about either overshadowing, or “lowering the tone of the neighbourhood”, in an uncompensated way.

Freeing up land use on the periphery (with appropriate internalising of infrastructure costs) stills seems the most important element in permanently lowering urban land prices, whether in NZ or the Uk or other similar places.